Bridge the financial gap for your kids with life insurance

Generational retirement planning

Retirement_pensions4-300x199New research finds a link between inheritances and retirement preparedness. For many, life insurance proceeds can help close the gap between what the next generation will have and what they need.

A recent study indicates that 52 percent of Americans are at risk of being unable to maintain their pre-retirement standard of living in retirement, with younger households in worse shape than those approaching their retirement years. While 45 percent of households headed by an individual age 50-59 are at risk of not maintaining their pre-retirement standard of living during retirement, a whopping 59 percent of households headed by an individual age 30-39 are at risk.

The younger generation has already seen a reduction in their future Social Security benefits and are far less likely to benefit from a guaranteed pension. With this in mind, the research examined the role inheritances play in lessening individuals’ post-retirement income shortfall. The research, sponsored by Prudential Financial, Inc., showed that receiving an inheritance can have a significant impact on a household’s overall retirement preparedness, especially for lower- to middle-income families.

The Overlooked Asset

When you think about a typical inheritance, what comes to mind is real estate, personal property, and financial assets. However, often overlooked is the fact that life insurance proceeds left to a beneficiary can function in a similar manner.

“There is a growing concern that future generations will have a very challenging time when it comes to retiring securely. With the decline of guaranteed pensions, rising housing costs, rising childcare costs, and increased student loan debt, young adults may not be contributing enough to their 401(k)s,” said Mark Hug, executive vice president, product and marketing, Prudential Individual (Life) Insurance. “The good news is that even a relatively modest life insurance death benefit can have a meaningful impact on improving the retirement security of the next generation.”

Life insurance proceeds can function similarly to an inheritance, if the death benefit is payable to a child who is the insured’s beneficiary. The transfer of wealth through life insurance has the added benefit of generally being received federal income tax free. In addition, a life insurance death benefit can make a meaningful difference when it comes to quality of life during retirement. Consider the following “shortfall” scenarios:

* The median shortfall for lower-income households at risk today is $56,986. That figure is projected to be $131,283 (in today’s dollars) when the head of the household turns age 65.

* Middle-income households fall short by $87,489 today. That number is projected to be $197,385 (in today’s dollars) when the head of the household turns age 65.

Every parent hopes to leave something to their children, and with the right financial planning, a life insurance policy may help close some or even all of those shortfalls. Regardless of an individual’s current assets, the death benefit from life insurance can be a tax-efficient way to leave a gift that may help to meaningfully improve the retirement preparedness of the next generation.

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